All the information auditors use to reach their opinion about your company’s financial statements are included as audit evidence. This evidence can include your organization’s policy documents, documented processes, invoices and reports. Third-party confirmations, bank statements, previous audit reports and any other company accounting records also are useful in obtaining quality audit evidence.

Gathering Evidence

Your company’s auditors must obtain evidence to express their opinion on the company’s financial statements. Because they can’t be expected to go through every transaction that occurred during the year, your auditors base their work on limited transactions or selected samples. They must gather all possible evidence to establish the honesty of the system to record these transactions. Auditors can verify the information on your statements by reviewing a variety of data sources, including inventory reports, available receipts and payments to suppliers.

Audit Evidence Sources

You can broadly divide the many sources of audit evidence into internal and external sources. The accounting and documentary records of your company usually are internal sources, whereas external sources can include information provided by banks, suppliers, debtors, stock exchanges and the Internal Revenue Service. The basic presumption is that audit evidence obtained from sources least affected by your organization is more reliable in nature because your company has very limited power to manipulate it. If the controls within your business are extremely strong, however, auditors might be happy to rely on internal sources of evidence. This is because strong controls imply reliable audit evidence.

Sufficient and Appropriate Evidence

When auditors verify the transactions associated with your company’s financial records, they are limited in timing and scope, which makes the quality of the evidence they obtain all the more important. If the quality of this evidence is substandard, the whole audit engagement becomes meaningless. Auditors must select an appropriate number of records, their selection must be adequate and relevant and they must be able to detect misstatements. Conducting a complete inventory count can provide satisfaction to the auditor that all units are indeed present in the inventory; however, counting alone, does not provide a basis for correct valuation of inventory. Adequate evidence requires a review of invoices along with payments made to suppliers.

Significance of Quality

An audit engagement is carried out to provide a third-party opinion. Those interested in your business, such as banks and investors, rely on this audit opinion and use it to make their own business or investment decisions in relation to your company. They trust the auditor’s opinion because they presume that the auditor has given an assurance only after carrying out quality work. You might notice that external parties rely on auditors and their work for critical business decisions. Due to this reliance on the auditor’s work, it is crucial that auditors base their financial statement opinions on strong evidence.